Chapter 5-6

These chapters are grouped together because they are case studies of contrasting approaches to economic development. Chapter 5 discusses the case of a failed village whose only assistance was a humanitarian loan.

Chapter 6 discusses the success of a similar village that received the full range of development assistance offered by the USDA Marketing Assistance Project (MAP). Chapter 6 discusses the success in milk marketing that occurred in Lejan village and was followed by similar developments in 35 other villages. Lejan vallage is only one of similar stories in other villages where other agribusiness firms were developed.

The successes of USDA MAP in new business investments such as those in dairy goat breeding, tomato processing, wine, milk and cheese processing and many more, will live on after MAP. They will live because they have new institutions to support them, like the Credit Clubs, Agribusiness Teaching Center, 4H Youth, Armenian Agricultural Extension, Applied Research, and a Leasing Company.

They will grow because MAP first identified markets, then invested millions in appropriate marketing and production firms, provided technical advising, and developed new institutions for nurturing new Armenian leaders.

Most importantly,leaders, with investment intervention and education, have found a new way of thinking and working for success.

Development of new leaders and their new way of thinking were key elements in assisting development of new firms mentioned in the Thumbnail Sketches. Without education of new leaders and new institutions to provide technical assistance, investment funds may have little impact.

Chapter 5

Village Institutions

That Don't Work

Doing Good is Not Always the Best Thing to Do

Psank Farm is an example of the failure of cheap loans and humanitarian aid. Psank Farm was given both and left to function by itself among the old institutions of the failed Soviet Union. With no new ways to view their problems and no innovations in their production-marketing system, they tried to continue the old system. Results should have been predictable.

Brief Background

In 1998, the Republic of Armenia had 330,000 farmers located in approximately 930 villages. Only in rare instances of a large private farm does one find an Armenian farmer who does not live in the village.

Following mass privatization efforts in 1990-91, the State Collective farms were abolished although the State retained large areas of common grazing grounds and some large plots of land devoted to research and educational institutions. Following privatization, private farm ownership was characterized by land holdings ranging from .25 hectares (about one half acre) to 2.5 hectares.

Orchards and vineyards were divided as well as open land and many permanent plantings were destroyed by their new owners in favor of planting wheat which provided both bread and a ready source of barter for other foodstuffs (and clothing) necessary for survival. Total agricultural output of the country began to fall almost immediately.

Small farm owners lacked cash to buy agricultural inputs such as fertilizer and pesticides needed for a more economical level of production. Armenians are still asking why such drastic measures were taken. Some farmers asked sarcastically if they were in reality given a burial plot rather than a farm. The answer of course is simple. There was no alternative. State socialism was finally bankrupt after years of collecting revenue for the social safety net of health, education and a welfare government and putting virtually no new investments into an inefficient marketing system and production plant ever so slowly falling into ruin.

After 50 years of neglect, the system was no longer sustainable. The most telling fact of demise is in the Republic's trade statistics. For several years following the breakup, Armenia's principle export was scrap iron.

As if the failure of communism was not enough burden for the Republic, Armenia was also fighting a bitter and expensive war with Azerbaijan over the ownership of Nagorno Karabakh, an enclave of Armenians lying totally within Azerbaijan. The war lasted from initial fighting in 1988 to a cessation only in 1994 in which rmenia declared victory via a cease-fire. As many as 700,000 Armenians fled the disaster seeking jobs in Russia, other CIS countries and in the West. They were replaced, however, with several hundred thousand Armenian refugees fleeing Azerbaijan, all of them seeking shelter and sustenance from a bankrupt economy. The Armenian population survived the most crucial period of 1993-95 only because of aid from the international donor community and remittances from relatives abroad. During 1993-96, the lights were out, the heat was off and one of every two loaves of bread came from donated U.S. wheat.

Against this backdrop of cataclysmic disaster, Armenian farmers in the villages began a struggle toward democracy and free enterprise. It is a struggle, which they still do not understand, but they have for now accepted as their only choice. Their stories are at times too incredible for belief; and while some are no doubt embellished in the telling, there are elements of truth for those who care about the future of democratic rule in the South Caucasus. The story of Psank Farm in the Talin region of Northwest Armenia is one such story. Undoubtedly Psank Farm needed cheap loans and humanitarian aid, but did it make a difference? I leave it to the reader to decide.

Psank Farm

Psank Farm is located on the edge of the earthquake zone of Gumrie and Spitak, where an earthquake killed 25,000 people in 1988. Armenians have always claimed there were far more but that the actual count was suppressed by the central government to avoid larger social paymentsfor a disaster exceeding this level.

On September 2, 1958, a U.S. C-130 was shot down by four MiG-17 and crashed near Psank Farm resulting in death of 17 American crew members. A monument was erected near the site, and, during the late summer of 1997, Ambassador Peter Tomsen visited the monument and held a commemorative ceremony in the village of Nerkin Sasnashen.

Ambassador Tomsen heard a story of how hail earlier in the year had partially destroyed 35 hectares (about 85 acres) of barley, 100 hectares of corn and 8 hectares of watermelon. The resulting loss was valued at $116,000. The farm would need to sell its inventory of pigs, cows and sheep because they had no feed to take them through the winter. The villagers themselves would be short of food with no milk or meat from the animals.

Livestock production is a principle activity of the village collective farm. Sixty families from four villages including Nerkin Sasnashen, Daftashen, Agarak, and Dprevak belong to the collective. The villagers, like a number of village farmers in Armenia, had chosen, at the beginning of privatization in 1991, to reform themselves into a private collective farm, not much different from the old days. The new collective, Psank Farm with 500 hectares of privatized and leased land, allowed them to continue using large farm machinery and familiar techniques to produce supplies of wheat and barley needed for their livestock.

The term "private collective farm" is preferred, and apparently unique to Armenia, even though in most respects the collective resembles a western style cooperative. The term "cooperative" in Armenia, however, carries a connotation referred to by farmers as artificial. The term cooperative, as described by Armenian farmers, refers to a system of privilege under the Soviet system whereby chosen members of the Party carried out a lucrative private business under the heading of a state owned "cooperative."

Humanitarian Aid Begins

The Ambassador suggested that as a humanitarian gesture, the USDA Marketing Assistance Project should make a loan or grant to assist the 60 farmers and 275 inhabitants of the villages. MAP suggested a $32,000 loan with no collateral and the village accepted. I would have had far fewer headaches had we made a grant.

Nothing really changed the way the people managed their affairs and nothing changed the environment of old Soviet institutions in which they lived.

The Environment of Failure.

Psank Farm had problems beyond the loss of livestock and food sources for the winter. These soon surfaced. They were in a dispute with the head of a neighboring village over use of leased land. Led by the Sasnashen village chief and Psank collective farm manager, the villages took their disagreement to the Aragatsotn Marzpet's (governor of the Marz) office where the lease was declared illegal. As an apparent compromise, the regional police chief ordered Psank Farm to turn over the disputed 15 hectares to him for a police farming operation.

Psank Farm held a meeting and declared they would not give up 15 hectares as they believed they already reached a satisfactory agreement with the other village. The Sasnashen village chief informed the police chief who declared that if the village did not give up the land, the village chief would be sorry. A few weeks later the village chief was quite sorry; he was arrested by the police chief and accused of murdering a gas station owner by the nickname of "Fro."

The village chief was taken to jail where he was beaten repeatedly in an attempt to make him confess. No confession and no evidence were ever obtained. He was declared innocent by the regional public prosecutor, and released from jail after seven days. His injuries required hospitalization and were apparent to the staff of USDA employees who reported the village chief could hardly walk and could not recognize people more than three meters distant. The village chief reported his complaint to Yerevan where Yerevan authorities yielded an answer which said that police were required to use all available means to obtain justice and the village chief should be satisfied that he was cleared of a murder charge.

The beating may have had an even more serious effect. After observing his beaten son, the father of the Psank Farm manager suffered an apparent heart attack and died shortly thereafter.

The village chief reported that the USDA loan and livestock feeding operation went well during the winter and spring of 1998. Animals were fed and sold. Prices at Christmas that year were good, and sales were $22,000, which the chief took to a local branch of Arm Savings Bank where he received a letter of deposit from the branch manager.

Later in the spring and summer, they sold more animals and were ready to pay back their loan to USDA. Upon visiting the bank to withdraw funds the collective farm was told there was no record of a deposit in the bank.

The bank was right? What about the letter of deposit? The villagers said the bank manager had not deposited the money but had kept it for his own use. The manager was arrested, tried and convicted, and began serving time in jail on his conviction of fraud. Arm Bank, however, refused to accept liability and the money was lost. Can you have saving and investment is this environment?

Bad Luck and Bad Leaders?

Bad weather continued to plague the village. Hail in the summer of 1998 again destroyed most of the wheat as verified by Ministry of Agriculture examiners. In the fall of 1998, the animals were again facing starvation. The collective appealed to USDA MAP to delay payment of the loan so that cash they had received from the previous spring an summer sales could be used to feed the animals in the winter of 1998 and spring of 1999. USDA accepted the rescheduling of the loan and the collective continued their operations. In the spring of 1999 the collective took their herds to high mountain pastures for grazing on new grass in the common grazing area.

Disaster struck from unknown sources. Poisoning by zinc phosphate destroyed most of the herd with a loss valued at $44,000s. The village chief's family was guarding the herd, and they were at first accused; however, witnesses (?) came forward who said they saw an unmarked police car deliver unknown persons to the area. Suspicion was cast on the regional police chief, but no evidence was ever found.

The village chief took livers of several dead animals to a regional veterinary laboratory for examination and was told that the livers showed definite evidence of poisoning and that the chief should return the next day for a certificate. The village chief reported that upon his return the next day the laboratory manager told him that he received a call from the police chief saying that if a certificate of poisoning was issued the laboratory chief would be looking for a new job.

The gods of hail had not yet forgotten the village. During the summer of 1999 following the poisoning, hail devastated the crop for the third successive year, again verified by the Ministry of Agriculture (MOA). Total hail damage for three years, (and a 30-year drought in fall of 1998 - spring of 1999) were estimated by MOA to have generated losses of just less than $300,000.

In the fall of 1999 with few animals and no feed, the collective decided to liquidate. They heard the Russian Embassy might be willing to buy their land; they would take the proceeds and repay their loan to the Americans. The Russians offered $50,000 for the entire collective. The village decided to sell and went to the Midland Bank (British owned) to collect their certificates of land ownership required for registration of their loan from USDA which was administered my Midland.

Midland Bank reported there were no certificates on file. The village chief produced a statement signed by a Midland lawyer who had received the certificates. The lawyer, however, no longer works for the bank, and a search of his records revealed no certificates. The land ownership certificates appear to be irretrievably lost. Who lost them? Are they really lost?

Unable to sell land, they tried to sell a house the village had built for a refugee family from Azerbaijan. To sell the house, two refugee families were required to live in one of two refugee houses built by the village. The village reported that although they had spent $15,000 building the house and they were offering it for $7,500, there were no takers.

The village chief returned to me in the fall of 1999 asking for advice on liquidation. He also indicated in a joking manner that the next step after that would be his hanging because liquidation would leave the village with no winter resources to buy flour, butter and sugar needed for the 275 inhabitants. I declared the entire loan and unpaid penalty interest to Midland as defaulted and paid in full to Midland by MAP, and offered a humanitarian grant for food. Total cost to USDA was $37,000 for the loan default plus a grant to be negotiated.

The chief said, however, that this would not finally solve his problem because in addition to his loan with USDA he had borrowed $20,000 additional dollars from persons not named (?). The Mafia? Who knows? There are no records.

The chief also advised that he was appreciative of USDA's intent to offer a grant for food, but "please don't give it in cash." A cash grant would be discovered and would attract people who would take it away from them.

A delivery of commodities might succeed. I offered a commodity donation and an additional loan. We delivered sugar, butter and flour, and as their future in livestock production seemed grim, I suggested the collective must look at other activities to support their families. Blank stares were the result. Humanitarian aid and a humanitarian loan made no impact on Psank Farm.

Summary

Has the market concept failed in Armenia? Will the Russians gain control of Psank Farm? Did they really offer to buy the farm or were the villagers playing the "Russian Card" for loan relief? What will happen to the people of the villages; do they have any flexibility to change, to seek new enterprises? Is this a true story of villains against the village or has the village embellished, even created, facts to avoid loan repayment?

Creating horror stories of weather related crop loss, dead animals and theft were common under the Soviet marketing system where production was to be delivered to the State, yet appeared on the black market.

Ministry of Agriculture officials are said to have accepted bribes for substantiating weather and death losses. Do they still? Did the members of Psank Farm use US dollars to recreate the old system?

Reviewing the facts of the case strongly suggests that the rudimentary market forces of Armenia need not have failed. Sixty six thousand dollars of property were claimed lost to poisoning and fraud. Regardless of who committed the crimes, these funds would have easily repaid the USDA loan and the additional loan from the unknown lender. In the absence of crime and with average weather losses, Psank Farm might be a success story today.

Conclusion

Events in a small village reveal a specter that haunts Armenia. Even if the weather and death stories are true, there was enough off-farm crime to crush the village. With appropriate development assistance, the will of the Armenian people can remove the specter of crime and allow market forces to act. An Armenian new way of thinking must insist that the rule of law prevail.

They must receive technical assistance with appropriate investment funds and they must acquire the education and discipline that will allow new leaders to succeed. They must acquire entirely new institutions that lead development. Otherwise, no amount of aid dollars and economic restructuring will save Armenia from bringing back the old ways when the State supplied the village with jobs, food, medical aid, housing, and boots for the winter.

If you are concerned about the future of democracy and development in Armenia and elsewhere, you should be concerned about Psank Farm. At times necessary and at times vital for survival, basic humanitarian aid and cheap loans do little to bring about the new way of thinking and doing required for development.

During my work in Poland, the Poles always referred to "a new way of thinking" whenever I asked the question, "What are the Americans accomplishing by teaching business planning?" Finally it became clear that a new way of thinking is embodied in new business models, in new education, and in new educational institutions that will be required to break away from the old ways.

Chapter 6 Milk Marketing Cooperatives and the MAP Model of Development

A General Development Hypothesis

A new way of thinking is required if new businesses and institutions are to develop in an organic living way that allows them to survive and grow in a market economy. Indigenous leaders and managers must be found and advised on new ways to organize and direct people.

They will need new educational institutions to assist them. Unless the elements of investment and education come together, U.S. dollars, whether for flour and sugar, or bricks and mortar, will evaporate as surely as the shadows of the U.S. advisers as they leave the country.

Psank farm had no access to education, no technical advice, no management advice, no help in market development; Psank farm had no way to develop a new way of thinking. Such was not the case in Lejan village where many import "Firsts" occurred.

Lejan village became the site of the first milk marketing cooperative in Armenia where at last count there were 35 in operation serving more than 10,000 farmers producing more than 4,000 tons of milk. Lejan village was the site of the first lease of Armenia's first leasing company (created by MAP). A key ingredient in the sucess of Lejan was installation of the first milk cooling tank in an Armenian village (leased by MAP).

Map provided Lejan with regular consulting on cooling tank technology and development of a Cooperative; Lejan became a success story containing most of the elements of the MAP approach to development.

One of the First Milk Cooling

Tanks in Armenia

Village Institutions that Work

What kind of economic development occurs when educational institutions provide a broad mix of education, technical assistance, credit and market development in addition to loans and humanitarian aid?

Lejan village is one example. In 1998 the farmers in Lejan kept a few cows for family milk consumption, they grew wheat and vegetables for the same purpose and generally lived at a subsistence level where barter trade provided staples like sugar, cooking oil, and flour. Their lifestyle was very similar to that at Psank Farm.

Milk maids commonly worked outside in the pasture

Institutional knowledge that assisted Lejan:

USDA MAP (now the Armenian NGO CARD)

Expanded demand for milk by developing:

New cheese products to expand the demand for milk

New packaging for local and export markets

Training to maintain milk quality during processing

The first milk packaging line in Armenia

Expanded farm production and profits:

Introduced artificial insemination to improve gene pool

Developed new winter housing to reduce cow herd disease

Provided training in maintaining milk quality on the farm

Provided leasing of milk cooling tanks to improve quality

Provided Credit Clubs to give farmers access to credit for:

Additional cows

Additional feed

Provided training to young people through a youth program

Advised on how to operate a marketing cooperative

What happened in Lejan as a result of new institutional effort?

Perhaps the best way to understand the Lejan development is to hear from a village leader.

What a Milk Cooling Tank Can Do: Interview with Sassoon

In June, 2006, I visited Lejan Village with Marianne Alexandrian and Felix Vardanian. In 2000 this village lived on barter trade. I met a woman there who had never seen an Armenian Dram (Armenia's new money first printed in 1992). In many ways the village was very similar to more than 930 in Armenia.

Lejan was the site of MAP's first leased cooling tank and we wanted an interview with the Sassoon the farmer and sometimes mayor of the village. Felix had identified Lejan and Sassoon in the Spring of 2000 as the place and the person for the first cooling tank lease.

Leasing,the first in Armenia, was introduced as an alternative to loan. Real business risk was involved. If the lease payments were not made villagers were told the cooling tank could be moved to a different village. Unlike Plank Farm, Lejan could be held accountable. Sasoon had prepared for the visit and the interview was translated by Marianne. The following taped interview was edited to provide continuity.

Mariann to Sassoon: Dr. Miller and Felix Vardanian gave you an opportunity to lease a milk cooling tank to improve the quality and marketability of your milk. How did this work out for you?

Comments of Sasoon: After a period of time we established a cooperative starting with only one cooling tank. There were 37 farmers and on May 9, 2000 we sent the first tank of milk to Yerevan. It was very successful and other people in the village joined the cooperative.

Soon farmers from five other communities joined the cooperative. There were 180 farmers in the five villages. Daily we were collecting about 400 liters of milk (about .4 ton). Now we have as much as 3.5 tons of milk daily.

Due to the cooperative we began to increase the use of arable land and we purchased a vacuum tank and truck to bring milk in from the mountains.

Now, every morning we are sending milk to the cheese processing plant at Tashir and milk continues to come in from surrounding communities. Another shipment is made daily to Vanidzor. If there is ever a surplus we deliver to Ashtorok.

With the help of MAP we established a credit club to increase production. This provided a very big push in the whole community when we established the credit club.

First, we used the credit club to purchase more cows. In 2001 there were about 500 cows in the villages. Currently, in June of 2006, there are about 1100 cows. Now, with more cash from milk, we can afford to buy corn that increases our milk production. The credit club loans started the whole chain of production.

I would like to present some numbers on credit clubs. We have four among the villages in the cooperative and in the beginning they had a total of 80 members. The total of their first loans were $48,800 and all of it was USDA money. In 2006 there were 109 members in the clubs and they borrowed $145,000 of which the USDA part was $87,000 and the club?s own money was $58,000. In the beginning farmers could use about $600 each. Now they average borrowing about $1,300 per year and with new production they can pay it back.

We are about 40 percent self-owned and the clubs have made us independent and sustainable even though about 40 farmers have left the farm since we started. In some cases, new young farmers have taken their place.

Now, there are several big farms. Mine is one of them and I have 200 cows. Many of the farmers have about 20 cows. Ashot who is here today has 34 cows. We have just begun to cooperate with Uni Company of Yerevan and they are growing about 170 cows and about as many goats for resale in our area.

The cooperative has also begun to work for the village. First, we built and equipped a small library. In 2004 we worked with Save The Children to build the hospital that I have shown you. The cooperative was able to hire the people to open the hospital. We also provide milk free of charge to the village school. The ages of children in the school are from 7 to 16. The Director of the school is here today and he is also the President of our credit club.

We also have provided potatoes and sugar to the school to supplement flour and oil they were receiving from World Vision.

We worked with MAP Extension TDY on a successful three-sided shed program to keep livestock in the winter. Our cows are much healthier in the winter. These sheds also kept some calves donated to the village by World Vision.

The cooperative also worked with MAP to establish a village Youth Club and later USAID also promoted youth clubs. World Vision and AID wanted to build on what MAP started.

During our growth, a 600 liter tank was not enough so we got a second one. This was still not large enough so we let the second one go back and replaced it with a 1000 liter tank.

We remember that in the beginning we bought milk from families who had no cash to buy bread or flour. Now you won"t find these kinds of families and we are very grateful to you. I don't see how we could have been in this state without MAP.

Comments from a village farmer: When I started in the cooperative there were four members of my family, me, my wife, and two sons. Now, I have added two daughters-in-law and three grandchildren. Life is very good.

Comment of Sasoon: We always talk about what USDA has done and everyone remembers your name. We were amazed at the dedication of MAP.

Comment of Bill Miller: Thank you Sasoon, but I want to leave you with one thought. You wouldn?t have cooling tanks without Felix Vardanian and you wouldn?t have a credit club without Marianne.

Conclusions

A tempting conclusion is to say that if you want growth you must create a new institution, in this case a cooperative. While this is true, it does not follow that if you create a cooperative you will achieve growth. The milk cooperative succeeded as a new institution only because the people in it dealt efficiently with profitable economic investments in milk cooling tanks. The same was true of investments made by MAP credit club members who are now owners of their own credit institution.

Perhaps most importantly, MAP worked on expanding demand for milk before working at the farm level. This was a key concept of MAP.

Beginning with the market, the entire system of bringing products from the farm to the consumer must be addressed.

The milk cooperative needed help from other institutions. It needed the new institution of credit clubs. It needed the technical assistance of MAP Extension TDY who advised not only in barn housing, but also on how to achieve milk quality (not reported here, but was present).

Continuing advice from agricultural extension was available to the cooperative throughout its existence and included advice both on dairying, but also on how to form and manage a cooperative.

The milk cooperative generated other institutions including the library, the hospital, the youth clubs, and it supported the local school. The library and the hospital are of course very primitive, but they are real and they are a start.

MAP as an Institution: What did MAP contribute? MAP correctly identified milk cooling tanks as a profitable investment. MAP provided a new institution via an Armenian leasing company to manage lease payments. MAP established credit clubs in which farmers became owners of their own investment capital. MAP provided on-going technical assistance in animal management and maintenance of milk quality. MAP developed a market for milk. By the end of the MAP project, a total of 35 milk processors and cheese makers received technical assistance and/or loans from MAP.

MAP started the development process by finding markets for cheese and by introducing new cheeses. Fifteen new cheese varieties were introduced, including Edam, Gouda, baby Swiss, Tom, Blue smoked String, Mozzarella and others.

This was the general MAP model -- develop a market that will work in the modern world and work backwards into the farm production sector.

A major mistake by most agricultural development models is to concentrate on how to find markets for existing farm production. Sadly, the existing farm production sector in developing countries is inefficient and incapable of supporting a modern marketing system. Thus, farm inefficiency leads to a second major mistake of development programs'; the attempt to improve the efficiency of farm production without dealing with the marketing system.

Macroeconomic Effects. There were macroeconomic impacts of MAP's program of leasing milk cooling tanks. The success at Lejan was repeated. Lejan milk cooperative was only one of 14 new milk marketing cooperatives created in six Marz's of Armenia (major administrative regions) where 30 milk tanks were leased. All followed the Lejan model, including the five new credit clubs that were formed.

New western style cooperatives served 19 villages and had 959 members, but more than 4,000 farmers who were not members of cooperatives received advising on milk production. By 2003 cooperatives and milk processors had paid members of cooperatives and non-member farmers, about 2.5 million dollars. Many villagers had cash for the first time.

At least one cooperative was more effective that Lejan. The Elita milk marketing cooperative had one third more members and marketed three times more milk as Lejan. The Golden Goat cooperative in Vyats Dzor Marz produced goat milk and was part of a unique effort that included goat breeding as a significant part of development.

As for measurement of macroeconomic effect, data collected in Armenia may not be able to discern the impact of the dairy sector for years to come. Most of the transactions are for cash and will not be reflected in tax data, nor will there be inspection data in this rudimentary economy. But few will doubt that real development occurred. There can be no doubt, also, that it all happened because of relevant institutions.